Should You Forget This High-Yield Pharma Stock and Buy a Growth Name Instead?

Key Points

• High-yield stocks may offer impressive levels of passive income — but it’s important to understand why the particular stock is high-yield.

• Dividends, if they’re maintained, can provide growth over the long term.

Dividend stocks may be a valuable element in your investing toolkit. This is because, no matter what the overall market is doing, they offer income that’s pretty much guaranteed — particularly if you choose a company with a long history of dividend growth. Investors who seek out dividend stocks pay close attention to a company’s dividend yield, and high-yield players — as long as they have the financial resources to maintain these payouts — could be particularly attractive.

So, if you’re looking to add growth to your portfolio, you may be tempted by the promise of a high-yield stock — but you also may consider a growth stock. This sort of company could truly supercharge your investing performance, but it often comes with a bit more risk.

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Should you forget the following high-yield pharma stock and buy a growth name instead? Let’s find out.

Image source: Getty Images.

Pay attention to financial health

As mentioned, investors often flock to high-yield stocks as they offer significant passive income. One thing to be aware of, however, is a company’s financial health and ability to maintain dividend payments: In some instances, a company may be struggling, its stock price might drop, and as a result, dividend yield will soar. In those instances, the company may eventually cut or suspend its dividend.

So it’s crucial to understand the reason behind a high dividend yield — this way, you won’t fall into the trap of buying a stock for this reason, only to see the passive income disappear shortly thereafter. Today, we’ll consider Pfizer (NYSE: PFE), a pharma giant that saw gains in dividend yield in recent years.

PFE Dividend Yield data by YCharts

It’s easy to explain the reason for this pattern. Pfizer, after reaching a record of more than $100 billion in revenue in 2022, entered a phase of transition. The company’s coronavirus products — the major revenue driver — saw declining demand, and certain older blockbusters were losing exclusivity. This led to a drop in growth and stock price, and therefore, the dividend yield climbed.

Pfizer’s transition

But Pfizer was prepared for the situation and reorganized its costs and infrastructure to better suit the revenue opportunity — and the company put a major focus on internal research and development as well as growth through acquisitions. This is starting to bear fruit, with operational revenue growth of 6% in the recent full year excluding the coronavirus product portfolio. The company recently went through a record period of product launches and is seeing growth from the acquisition of oncology specialist Seagen — for example, key product Padcev delivered 15% growth in the latest quarter. This is significant as it’s helping Pfizer along the path to a big goal: to become a giant in the oncology market.

Meanwhile, Pfizer’s pipeline looks promising, with 20 pivotal study starts expected this year — if even only a handful make it to the finish line, this still could represent significant growth down the line.

All of this offers us reason to be confident about Pfizer’s dividend payments moving forward, even if the dividend yield eventually returns to its historic levels, of a bit under 4%.

Should you stick with Pfizer?

So, should you stick with Pfizer or buy a growth name? For example, biotech players like Viking Therapeutics or CRISPR Therapeutics could see their shares soar as their innovative candidates advance. Or you could even consider a name that’s already delivered significant growth and could be on track to deliver more, such as Vertex Pharmaceuticals.

Your choice truly depends on your investment strategy and feelings about risk. If you’re a very aggressive investor who doesn’t mind a bit of risk, a biotech in the earlier stages of its growth story — such as Viking or CRISPR Therapeutics — may be the best choice for you. If you’re a middle-of-the-road investor, appreciating a balance of safety and growth, you might look for companies such as Vertex and other biotechs with several products on the market, along with exciting research that should drive new waves of growth over time.

Finally, if you’re a cautious investor, don’t forget this particular high-yield stock: Pfizer’s dividend is likely to offer you significant passive income over the long run — and this top pharma player may deliver positive stock performance, too, as it continues along the path to recovery and steady growth.

Should you buy stock in Pfizer right now?

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Adria Cimino has positions in Vertex Pharmaceuticals. The Motley Fool has positions in and recommends CRISPR Therapeutics, Pfizer, and Vertex Pharmaceuticals. The Motley Fool recommends Viking Therapeutics. The Motley Fool has a disclosure policy.